Thursday, April 19, 2012

Although Republicans and Democrats rarely agree on anything these days, Congress has passed and President Obama signed on April 5, 2012 the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that dramatically relaxes regulations on raising capital for startup companies. The law was backed by Republicans, as well as tech companies and their venture capital backers. While encouraging independent filmmaking was not on the mind of Congress when it passed this law, it promises to dramatically expand the ability of filmmakers to raise financing for their projects.

In Silicon Valley, entrepreneurs often raise large amounts of capital for risky start-ups. However, the number of Initial Public Offerings is much less than it was before the dot com bubble burst. In 1996, there were 791 Initial Public Offerings (IPO) while from 2001 to 2008 the average was a mere 157 a year. Of course, this reduced activity may be due to investors assuming a more prudent investment strategy after losing their shirts in the dot com crash, or it could be a reaction to new regulations. Among other changes enacted, Wall Street firms are prohibited from promoting stocks with their own questionable research, an obvious conflict of interest.

The new Act relaxes some restrictions for smaller emerging growth companies. It seeks to encourage entrepreneurs because most new jobs are created by small businesses, not large ones. Consequently, this new law could be the impetus for an economic boom – at least that is the hope of its backers. No doubt, some of the “reforms” in the Act are of questionable merit and could open the door to new abuses. However, the current laws governing the raising small amounts of capital are unduly onerous for entrepreneurs, and have been for many decades. Furthermore, these laws have clearly not kept pace with technological change and the methods we use nowadays to communicate with one another. If anyone understands the potential of the crowd, it should be President Obama. In the last presidential election, he raised nearly three-quarters of a billion dollars from Internet solicitations, mostly small donations.

Most promising for indie filmmakers, the JOBS Act contains provisions that for the first time will allow internet crowdfunding for the production of films. Crowdfunding is a method of raising capital by obtaining small amounts of money from a large number of investors. Although existing companies like Kickstarter.com and IndieGoGo currently enable filmmakers to raise funding through donations (i.e., gifts), this new law, when it becomes effective, will allow filmmakers to raise up to one million dollars in equity investments by soliciting the general public without the prior restraints.

The prime restriction that hampered filmmakers from raising funds using the internet was the prohibition on public solicitation for what are called private placements. Public solicitation is any form of advertising or approaching strangers such as by putting leaflets on their car windows. Up until now, the law has required a “pre-existing relationship” between the filmmaker and the potential investor. It was not always clear how much of a relationship was required. There are filmmakers today who have thousands of "friends" on Facebook. Some of these connections may be fairly tenuous and the filmmaker may have never met some friends in person. Do these contacts count as a pre-existing relationship if the extent of the bond is merely accepting an invitation to connect? Fortunately, these kinds of issues don’t seem to matter much anymore with the passage of the JOBS Act.

For many businesses, a million dollars is not a lot of money, but for filmmakers it can be more than sufficient to produce a feature film. Indeed, with the use of digital cameras and a laptop with Final Cut Pro, many films are made for less. Moreover, about 40 states now offer production incentives, enabling producers to stretch their funding. And by spreading the risk among a large pool of small investors through crowdfunding, no one gets burned badly if the movie flops.

The major problem with film investments has always been their extreme risk and the expense involved in complying with the laws that regulate investments. Filmmakers were free to go after an unlimited number of high rollers they had relationships with, plus up to 35 middle class investors. But most aspiring indie filmmakers don’t hang around the craps table in Vegas and don't know many wealthy individuals. So they often relied on friends and family, or their own resources, including borrowing money against one's house, or at least in one celebrated instance, selling their blood. Other filmmakers used various subterfuges to reach potential investors and hoped the SEC would not notice. Most of the time the authorities paid them no mind as they had bigger fish to fry. I once spoke to a federal prosecutor on behalf of a client who had been defrauded of several hundred thousand dollars in a fraudulent film investment. The prosecutor confessed that unless at least a million dollars was at stake, the case was just too small for him to pursue. There are just too many bigger crooks out there.

Crowdfunding may hold another advantage for filmmakers unrelated to raising money. One of the major problems facing independent filmmakers is how to market and distribute their completed movies. Today it is a buyer's market and distributors have thousands of films to choose from when deciding what to acquire. Of course, self-distribution is always an option, and anyone can put their film up on YouTube or other portals. But without effective promotion the film may just sit there undiscovered. However, if a film is financed by a crowd, one starts with a community backing the project, and each member has an incentive to spread the word about the film. As the major studios have seen, a film that receives bad word--of-mouth on opening weekend falls faster and harder than ever before, while at the same time, an unknown title can quickly catch fire and become an overnight sensation. Moreover, funds could be used for advertising and distribution provided that use is disclosed to investors.

The potential for crowdfunding looks promising. There are many examples of enterprising filmmakers who have already funded films with crowd sourced donations. In these instances, the donors have no expectation of sharing in any financial return, but have the satisfaction of supporting a project they believe in. They could also be given t-shirts, a DVD of the completed movie, a screen credit or an invitation to the wrap party or premiere screenings. In other words, they receive benefits not considered an equity interest and therefore not subject to state and federal security laws. However, filmmakers need to cautious if they decide to fund a film through crowdfunding. They need to make sure they do not overpromise what investors may receive or they could be liable for fraud. One of the major safeguards in the legislation for investors is that offers to investors need to be made through a Broker-Dealer or a funding portal that is registered with the SEC under rules to be developed. These intermediaries will be responsible for trying to keep the fraudsters out of the system and offer some comfort to investors that they are not investing with a Nigerian con artist who last week was soliciting you for help in transferring millions of dollars as part of some internet scam.

The SEC has 270 days to implement additional regulations, and it is not clear at this time how restrictive or liberal these rules may be. The SEC is inviting the public to send in comments on each of the seven titles of the law including the crowdfunding provision, which is Title III. This is an opportunity for filmmakers to express their concerns about the rules that will be adopted to enforce provisions of the JOBS act. Filmmakers can submit comments via either email or on the SEC website.

Tuesday, April 10, 2012

President Obama signed last week the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that dramatically relaxes regulations on raising capital for startup companies. The Act has provisions that for the first time will allow internet crowdfunding of small businesses, such as producing indie films. Crowdfunding is a method of raising capital by obtaining small amounts of money from a large number of investors. Although existing companies like kickstarter.com enable filmmakers to raise funding through donations (i.e. gifts), this new law, when it becomes effective, will allow filmmakers to raise up to one million dollars in equity investments by soliciting the general public without complying with the onerous security regulations currently in place.

Up until now, it has been difficult for filmmakers to raise financing either through a public offering or a private offering. A public offering is made to the public at large and requires SEC approval. A company selling stock on the New York Stock Exchange is an example of a public offering. Registration for a public offering is both time-consuming and expensive, costing hundreds of thousands of dollars, and not a realistic alternative for most low-budget filmmakers.

A private offering, on the other hand, is generally restricted to people the promoter already knows, or as the law states, with whom the promoter has a “pre-existing relationship.” Advertising is generally prohibited. While a private offering is not nearly as expensive as public offering, the fees for the creation of a Private Placement Memorandum (PPM) can easily exceed $25,000, which is not an insignificant expense for a small entrepreneur.

The new law had bi-partisan support. It passed Congress with a 73-26 Senate vote and a 380-41 House vote. It allows non-accredited investors to participate in funding rounds. Non-accredited investors are essentially everyone who is not rich. In the past there have been significant limitations on the number of non-accredited investors a filmmaker could accept in an offering, typically no more than 35.

The SEC has 270 days to implement additional regulations, and it is not clear at this time how restrictive or liberal these rules may be. So it will be early 2013 when filmmakers will be able to actually start raising funds. Investors with a net worth under $100,000 are limited to investing the greater of$2,000or 5% of their annual income or net worth, whichever is greater. Wealthier investors can invest 10 percent of their annual income or net worth, not to exceed a maximum aggregate amount sold of $100,000. Offers must be made through a Broker-Dealer or a "funding portal" that is registered with the SEC, pursuant to rules and regulations to be developed. Such intermediaries will need to provide detailed disclosures to investors and make sure potential investors confirm that they are willing to risk losing their entire investment.

The company seeking funding will need to disclose its financial condition including: a) If the target offering amount is $100,000 or less, then the most recent year's income tax returns (if any); as well as financial statements of the issuer certified by the principal executive officer of the issuer as being true and complete in all material aspects; b) If the target offering amount is over $100,000, but not more than $500,000, the issuer must provide financial statements reviewed by an independent public accountant; and, c) If the target offering amount is over $500,000, the issuer must provide audited financial statements. So crowdfunding is not going to be as simple as soliciting investors from your blog or facebook, and the costs may not be any less than what it currently costs to prepare a PPM. However, being able to use the internet to attract many small investors could make it much easier to raise funds. Investors risking $2,000 may be more willing to tolerate on the risks of filmmaking than those being asked to invest larger sums.

Besides the ability to raise funds through crowdfunding, the Act made a major change to Reg D 506 offerings, which are offerings limited to accredited investors (i.e. wealthy people) or sophisticated investors. For the first time the restrictions on public solicitations have been removed which means that the offering company could solicit investors including approaching them over the Internet. The SEC has 90 days to develop rules to implement this change.

Critics of the new law claim that these changes will open the floodgates for scammers to raise funds from unwary investors. With that in mind, investors may want to read the article I wrote for the Vanderbilt Law Journal about protecting film investors at: link

The new act is reprinted below:

-H.R.3606--

H.R.3606

One Hundred Twelfth Congress

of the

United States of America

AT THE SECOND SESSION

Begun and held at the City of Washington on Tuesday,

the third day of January, two thousand and twelve

An Act

To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Jumpstart Our Business Startups Act'.

SEC. 2. TABLE OF CONTENTS.

The table of contents of this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.

TITLE I--REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES

TITLE I--REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES

SEC. 101. DEFINITIONS.

(a) Securities Act of 1933- Section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)) is amended by adding at the end the following:

`(19) The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of--

`(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;

`(B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under this title;

`(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or

`(D) the date on which such issuer is deemed to be a `large accelerated filer', as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.'.

(1) by redesignating paragraph (77), as added by section 941(a) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111-203, 124 Stat. 1890), as paragraph (79); and

(2) by adding at the end the following:

`(80) EMERGING GROWTH COMPANY- The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of--

`(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;

`(B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933;

`(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or

`(D) the date on which such issuer is deemed to be a `large accelerated filer', as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.'.

(c) Other Definitions- As used in this title, the following definitions shall apply:

(1) COMMISSION- The term `Commission' means the Securities and Exchange Commission.

(2) INITIAL PUBLIC OFFERING DATE- The term `initial public offering date' means the date of the first sale of common equity securities of an issuer pursuant to an effective registration statement under the Securities Act of 1933.

(d) Effective Date- Notwithstanding section 2(a)(19) of the Securities Act of 1933 and section 3(a)(80) of the Securities Exchange Act of 1934, an issuer shall not be an emerging growth company for purposes of such Acts if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.

`(A) IN GENERAL- An emerging growth company shall be exempt from the requirements of subsections (a) and (b).

`(B) COMPLIANCE AFTER TERMINATION OF EMERGING GROWTH COMPANY TREATMENT- An issuer that was an emerging growth company but is no longer an emerging growth company shall include the first separate resolution described under subsection (a)(1) not later than the end of--

`(i) in the case of an issuer that was an emerging growth company for less than 2 years after the date of first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933, the 3-year period beginning on such date; and

`(ii) in the case of any other issuer, the 1-year period beginning on the date the issuer is no longer an emerging growth company.'.

(2) PROXIES- Section 14(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(i)) is amended by inserting `, for any issuer other than an emerging growth company,' after `including'.

(3) COMPENSATION DISCLOSURES- Section 953(b)(1) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111-203; 124 Stat. 1904) is amended by inserting `, other than an emerging growth company, as that term is defined in section 3(a) of the Securities Exchange Act of 1934,' after `require each issuer'.

`(A) need not present more than 2 years of audited financial statements in order for the registration statement of such emerging growth company with respect to an initial public offering of its common equity securities to be effective, and in any other registration statement to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17, Code of Federal Regulations, for any period prior to the earliest audited period presented in connection with its initial public offering; and

`(B) may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a))) is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers.'.

(2) SECURITIES EXCHANGE ACT OF 1934- Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) is amended by adding at the end the following: `In any registration statement, periodic report, or other reports to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17, Code of Federal Regulations, for any period prior to the earliest audited period presented in connection with its first registration statement that became effective under this Act or the Securities Act of 1933 and, with respect to any such statement or reports, an emerging growth company may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a))) is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers.'.

(c) Other Disclosures- An emerging growth company may comply with section 229.303(a) of title 17, Code of Federal Regulations, or any successor thereto, by providing information required by such section with respect to the financial statements of the emerging growth company for each period presented pursuant to section 7(a) of the Securities Act of 1933 (15 U.S.C. 77g(a)). An emerging growth company may comply with section 229.402 of title 17, Code of Federal Regulations, or any successor thereto, by disclosing the same information as any issuer with a market value of outstanding voting and nonvoting common equity held by non-affiliates of less than $75,000,000.

SEC. 103. INTERNAL CONTROLS AUDIT.

Section 404(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262(b)) is amended by inserting `, other than an issuer that is an emerging growth company (as defined in section 3 of the Securities Exchange Act of 1934),' before `shall attest to'.

SEC. 104. AUDITING STANDARDS.

Section 103(a)(3) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7213(a)(3)) is amended by adding at the end the following:

`(C) TRANSITION PERIOD FOR EMERGING GROWTH COMPANIES- Any rules of the Board requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer (auditor discussion and analysis) shall not apply to an audit of an emerging growth company, as defined in section 3 of the Securities Exchange Act of 1934. Any additional rules adopted by the Board after the date of enactment of this subparagraph shall not apply to an audit of any emerging growth company, unless the Commission determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.'.

(a) Provision of Research- Section 2(a)(3) of the Securities Act of 1933 (15 U.S.C. 77b(a)(3)) is amended by adding at the end the following: `The publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering of the common equity securities of such emerging growth company pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective shall be deemed for purposes of paragraph (10) of this subsection and section 5(c) not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer. As used in this paragraph, the term `research report' means a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.'.

`(c) Limitation- Notwithstanding subsection (a) or any other provision of law, neither the Commission nor any national securities association registered under section 15A may adopt or maintain any rule or regulation in connection with an initial public offering of the common equity of an emerging growth company--

`(1) restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor; or

`(2) restricting a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst.'.

`(d) Limitation- Notwithstanding any other provision of this section, an emerging growth company or any person authorized to act on behalf of an emerging growth company may engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, as such terms are respectively defined in section 230.144A and section 230.501(a) of title 17, Code of Federal Regulations, or any successor thereto, to determine whether such investors might have an interest in a contemplated securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of subsection (b)(2).'.

(d) Post Offering Communications- Neither the Commission nor any national securities association registered under section 15A of the Securities Exchange Act of 1934 may adopt or maintain any rule or regulation prohibiting any broker, dealer, or member of a national securities association from publishing or distributing any research report or making a public appearance, with respect to the securities of an emerging growth company, either--

(1) within any prescribed period of time following the initial public offering date of the emerging growth company; or

(2) within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.

SEC. 106. OTHER MATTERS.

(a) Draft Registration Statements- Section 6 of the Securities Act of 1933 (15 U.S.C. 77f) is amended by adding at the end the following:

`(e) Emerging Growth Companies-

`(1) IN GENERAL- Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in section 230.433(h)(4) of title 17, Code of Federal Regulations, or any successor thereto.

`(2) CONFIDENTIALITY- Notwithstanding any other provision of this title, the Commission shall not be compelled to disclose any information provided to or obtained by the Commission pursuant to this subsection. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552. Information described in or obtained pursuant to this subsection shall be deemed to constitute confidential information for purposes of section 24(b)(2) of the Securities Exchange Act of 1934.'.

(b) Tick Size- Section 11A(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78k-1(c)) is amended by adding at the end the following new paragraph:

`(6) TICK SIZE-

`(A) STUDY AND REPORT- The Commission shall conduct a study examining the transition to trading and quoting securities in one penny increments, also known as decimalization. The study shall examine the impact that decimalization has had on the number of initial public offerings since its implementation relative to the period before its implementation. The study shall also examine the impact that this change has had on liquidity for small and middle capitalization company securities and whether there is sufficient economic incentive to support trading operations in these securities in penny increments. Not later than 90 days after the date of enactment of this paragraph, the Commission shall submit to Congress a report on the findings of the study.

`(B) DESIGNATION- If the Commission determines that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01, the Commission may, by rule not later than 180 days after the date of enactment of this paragraph, designate a minimum increment for the securities of emerging growth companies that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue.'.

SEC. 107. OPT-IN RIGHT FOR EMERGING GROWTH COMPANIES.

(a) In General- With respect to an exemption provided to emerging growth companies under this title, or an amendment made by this title, an emerging growth company may choose to forgo such exemption and instead comply with the requirements that apply to an issuer that is not an emerging growth company.

(b) Special Rule- Notwithstanding subsection (a), with respect to the extension of time to comply with new or revised financial accounting standards provided under section 7(a)(2)(B) of the Securities Act of 1933 and section 13(a) of the Securities Exchange Act of 1934, as added by section 102(b), if an emerging growth company chooses to comply with such standards to the same extent that a non-emerging growth company is required to comply with such standards, the emerging growth company--

(1) must make such choice at the time the company is first required to file a registration statement, periodic report, or other report with the Commission under section 13 of the Securities Exchange Act of 1934 and notify the Securities and Exchange Commission of such choice;

(2) may not select some standards to comply with in such manner and not others, but must comply with all such standards to the same extent that a non-emerging growth company is required to comply with such standards; and

(3) must continue to comply with such standards to the same extent that a non-emerging growth company is required to comply with such standards for as long as the company remains an emerging growth company.

(1) comprehensively analyze the current registration requirements of such regulation; and

(2) determine how such requirements can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.

(b) Report- Not later than 180 days after the date of enactment of this title, the Commission shall transmit to Congress a report of the review conducted under subsection (a). The report shall include the specific recommendations of the Commission on how to streamline the registration process in order to make it more efficient and less burdensome for the Commission and for prospective issuers who are emerging growth companies.

TITLE II--ACCESS TO CAPITAL FOR JOB CREATORS

SEC. 201. MODIFICATION OF EXEMPTION.

(a) Modification of Rules-

(1) Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. Section 230.506 of title 17, Code of Federal Regulations, as revised pursuant to this section, shall continue to be treated as a regulation issued under section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)).

(2) Not later than 90 days after the date of enactment of this Act, the Securities and Exchange Commission shall revise subsection (d)(1) of section 230.144A of title 17, Code of Federal Regulations, to provide that securities sold under such revised exemption may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer.

(1) by striking `The provisions of section 5' and inserting `(a) The provisions of section 5'; and

(2) by adding at the end the following:

`(b) Offers and sales exempt under section 230.506 of title 17, Code of Federal Regulations (as revised pursuant to section 201 of the Jumpstart Our Business Startups Act) shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.'.

(1) by striking `The provisions of section 5' and inserting `(a) The provisions of section 5'; and

(2) by adding at the end the following:

`(b)(1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under this Act, no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 15(a)(1) of this title, solely because--

`(A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means;

`(B) that person or any person associated with that person co-invests in such securities; or

`(C) that person or any person associated with that person provides ancillary services with respect to such securities.

`(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if--

`(A) such person and each person associated with that person receives no compensation in connection with the purchase or sale of such security;

`(B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and

`(C) such person is not subject to a statutory disqualification as defined in section 3(a)(39) of this title and does not have any person associated with that person subject to such a statutory disqualification.

`(3) For the purposes of this subsection, the term `ancillary services' means--

`(A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and

`(B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.'.

TITLE III--CROWDFUNDING

SEC. 301. SHORT TITLE.

This title may be cited as the `Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012' or the `CROWDFUND Act'.

SEC. 302. CROWDFUNDING EXEMPTION.

(a) Securities Act of 1933- Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended by adding at the end the following:

`(6) transactions involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that--

`(A) the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, is not more than $1,000,000;

`(B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed--

`(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and

`(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;

`(C) the transaction is conducted through a broker or funding portal that complies with the requirements of section 4A(a); and

`(D) the issuer complies with the requirements of section 4A(b).'.

(b) Requirements To Qualify for Crowdfunding Exemption- The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after section 4 the following:

`SEC. 4A. REQUIREMENTS WITH RESPECT TO CERTAIN SMALL TRANSACTIONS.

`(a) Requirements on Intermediaries- A person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others pursuant to section 4(6) shall--

`(1) register with the Commission as--

`(A) a broker; or

`(B) a funding portal (as defined in section 3(a)(80) of the Securities Exchange Act of 1934);

`(2) register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934);

`(3) provide such disclosures, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate;

`(4) ensure that each investor--

`(A) reviews investor-education information, in accordance with standards established by the Commission, by rule;

`(B) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and

`(C) answers questions demonstrating--

`(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;

`(ii) an understanding of the risk of illiquidity; and

`(iii) an understanding of such other matters as the Commission determines appropriate, by rule;

`(5) take such measures to reduce the risk of fraud with respect to such transactions, as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;

`(6) not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the Commission may establish), make available to the Commission and to potential investors any information provided by the issuer pursuant to subsection (b);

`(7) ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the Commission shall, by rule, determine appropriate;

`(8) make such efforts as the Commission determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 4(6) that, in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B);

`(9) take such steps to protect the privacy of information collected from investors as the Commission shall, by rule, determine appropriate;

`(10) not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor;

`(11) prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services; and

`(12) meet such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

`(b) Requirements for Issuers- For purposes of section 4(6), an issuer who offers or sells securities shall--

`(1) file with the Commission and provide to investors and the relevant broker or funding portal, and make available to potential investors--

`(A) the name, legal status, physical address, and website address of the issuer;

`(B) the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;

`(C) a description of the business of the issuer and the anticipated business plan of the issuer;

`(D) a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under section 4(6) within the preceding 12-month period, have, in the aggregate, target offering amounts of--

`(i) $100,000 or less--

`(I) the income tax returns filed by the issuer for the most recently completed year (if any); and

`(II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;

`(ii) more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the Commission, by rule, for such purpose; and

`(iii) more than $500,000 (or such other amount as the Commission may establish, by rule), audited financial statements;

`(E) a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount;

`(F) the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;

`(G) the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;

`(H) a description of the ownership and capital structure of the issuer, including--

`(i) terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;

`(ii) a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;

`(iii) the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;

`(iv) how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and

`(v) the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and

`(I) such other information as the Commission may, by rule, prescribe, for the protection of investors and in the public interest;

`(2) not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker;

`(3) not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication;

`(4) not less than annually, file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule; and

`(5) comply with such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.

`(c) Liability for Material Misstatements and Omissions-

`(1) ACTIONS AUTHORIZED-

`(A) IN GENERAL- Subject to paragraph (2), a person who purchases a security in a transaction exempted by the provisions of section 4(6) may bring an action against an issuer described in paragraph (2), either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if such person no longer owns the security.

`(B) LIABILITY- An action brought under this paragraph shall be subject to the provisions of section 12(b) and section 13, as if the liability were created under section 12(a)(2).

`(2) APPLICABILITY- An issuer shall be liable in an action under paragraph (1), if the issuer--

`(A) by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by any means of any written or oral communication, in the offering or sale of a security in a transaction exempted by the provisions of section 4(6), makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and

`(B) does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

`(3) DEFINITION- As used in this subsection, the term `issuer' includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 4(6), and any person who offers or sells the security in such offering.

`(d) Information Available to States- The Commission shall make, or shall cause to be made by the relevant broker or funding portal, the information described in subsection (b) and such other information as the Commission, by rule, determines appropriate, available to the securities commission (or any agency or office performing like functions) of each State and territory of the United States and the District of Columbia.

`(e) Restrictions on Sales- Securities issued pursuant to a transaction described in section 4(6)--

`(1) may not be transferred by the purchaser of such securities during the 1-year period beginning on the date of purchase, unless such securities are transferred--

`(A) to the issuer of the securities;

`(B) to an accredited investor;

`(C) as part of an offering registered with the Commission; or

`(D) to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the Commission; and

`(2) shall be subject to such other limitations as the Commission shall, by rule, establish.

`(f) Applicability- Section 4(6) shall not apply to transactions involving the offer or sale of securities by any issuer that--

`(1) is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia;

`(2) is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934;

`(3) is an investment company, as defined in section 3 of the Investment Company Act of 1940, or is excluded from the definition of investment company by section 3(b) or section 3(c) of that Act; or

`(4) the Commission, by rule or regulation, determines appropriate.

`(g) Rule of Construction- Nothing in this section or section 4(6) shall be construed as preventing an issuer from raising capital through methods not described under section 4(6).

`(h) Certain Calculations-

`(1) DOLLAR AMOUNTS- Dollar amounts in section 4(6) and subsection (b) of this section shall be adjusted by the Commission not less frequently than once every 5 years, by notice published in the Federal Register to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.

`(2) INCOME AND NET WORTH- The income and net worth of a natural person under section 4(6)(B) shall be calculated in accordance with any rules of the Commission under this title regarding the calculation of the income and net worth, respectively, of an accredited investor.'.

(c) Rulemaking- Not later than 270 days after the date of enactment of this Act, the Securities and Exchange Commission (in this title referred to as the `Commission') shall issue such rules as the Commission determines may be necessary or appropriate for the protection of investors to carry out sections 4(6) and section 4A of the Securities Act of 1933, as added by this title. In carrying out this section, the Commission shall consult with any securities commission (or any agency or office performing like functions) of the States, any territory of the United States, and the District of Columbia, which seeks to consult with the Commission, and with any applicable national securities association.

(d) Disqualification-

(1) IN GENERAL- Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, establish disqualification provisions under which--

(A) an issuer shall not be eligible to offer securities pursuant to section 4(6) of the Securities Act of 1933, as added by this title; and

(B) a broker or funding portal shall not be eligible to effect or participate in transactions pursuant to that section 4(6).

(A) be substantially similar to the provisions of section 230.262 of title 17, Code of Federal Regulations (or any successor thereto); and

(B) disqualify any offering or sale of securities by a person that--

(i) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that--

(I) bars the person from--

(aa) association with an entity regulated by such commission, authority, agency, or officer;

(bb) engaging in the business of securities, insurance, or banking; or

(cc) engaging in savings association or credit union activities; or

(II) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or

(ii) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.

SEC. 303. EXCLUSION OF CROWDFUNDING INVESTORS FROM SHAREHOLDER CAP.

(a) Exemption- Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is amended by adding at the end the following:

`(6) EXCLUSION FOR PERSONS HOLDING CERTAIN SECURITIES- The Commission shall, by rule, exempt, conditionally or unconditionally, securities acquired pursuant to an offering made under section 4(6) of the Securities Act of 1933 from the provisions of this subsection.'.

(b) Rulemaking- The Commission shall issue a rule to carry out section 12(g)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as added by this section, not later than 270 days after the date of enactment of this Act.

SEC. 304. FUNDING PORTAL REGULATION.

(a) Exemption-

(1) IN GENERAL- Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end the following:

`(h) Limited Exemption for Funding Portals-

`(1) IN GENERAL- The Commission shall, by rule, exempt, conditionally or unconditionally, a registered funding portal from the requirement to register as a broker or dealer under section 15(a)(1), provided that such funding portal--

`(A) remains subject to the examination, enforcement, and other rulemaking authority of the Commission;

`(B) is a member of a national securities association registered under section 15A; and

`(C) is subject to such other requirements under this title as the Commission determines appropriate under such rule.

`(2) NATIONAL SECURITIES ASSOCIATION MEMBERSHIP- For purposes of sections 15(b)(8) and 15A, the term `broker or dealer' includes a funding portal and the term `registered broker or dealer' includes a registered funding portal, except to the extent that the Commission, by rule, determines otherwise, provided that a national securities association shall only examine for and enforce against a registered funding portal rules of such national securities association written specifically for registered funding portals.'.

(2) RULEMAKING- The Commission shall issue a rule to carry out section 3(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as added by this subsection, not later than 270 days after the date of enactment of this Act.

(b) Definition- Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:

`(80) FUNDING PORTAL- The term `funding portal' means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)), that does not--

`(A) offer investment advice or recommendations;

`(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;

`(C) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

`(E) engage in such other activities as the Commission, by rule, determines appropriate.'.

SEC. 305. RELATIONSHIP WITH STATE LAW.

(a) In General- Section 18(b)(4) of the Securities Act of 1933 (15 U.S.C. 77r(b)(4)) is amended--

(1) by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively; and

(2) by inserting after subparagraph (B) the following:

`(C) section 4(6);'.

(b) Clarification of the Preservation of State Enforcement Authority-

(1) IN GENERAL- The amendments made by subsection (a) relate solely to State registration, documentation, and offering requirements, as described under section 18(a) of Securities Act of 1933 (15 U.S.C. 77r(a)), and shall have no impact or limitation on other State authority to take enforcement action with regard to an issuer, funding portal, or any other person or entity using the exemption from registration provided by section 4(6) of that Act.

(2) CLARIFICATION OF STATE JURISDICTION OVER UNLAWFUL CONDUCT OF FUNDING PORTALS AND ISSUERS- Section 18(c)(1) of the Securities Act of 1933 (15 U.S.C. 77r(c)(1)) is amended by striking `with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.' and inserting the following: `, in connection with securities or securities transactions

`(A) with respect to--

`(i) fraud or deceit; or

`(ii) unlawful conduct by a broker or dealer; and

`(B) in connection to a transaction described under section 4(6), with respect to--

(c) Notice Filings Permitted- Section 18(c)(2) of the Securities Act of 1933 (15 U.S.C. 77r(c)(2)) is amended by adding at the end the following:

`(F) FEES NOT PERMITTED ON CROWDFUNDED SECURITIES- Notwithstanding subparagraphs (A), (B), and (C), no filing or fee may be required with respect to any security that is a covered security pursuant to subsection (b)(4)(B), or will be such a covered security upon completion of the transaction, except for the securities commission (or any agency or office performing like functions) of the State of the principal place of business of the issuer, or any State in which purchasers of 50 percent or greater of the aggregate amount of the issue are residents, provided that for purposes of this subparagraph, the term `State' includes the District of Columbia and the territories of the United States.'.

(d) Funding Portals-

(1) STATE EXEMPTIONS AND OVERSIGHT- Section 15(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(i)) is amended--

(A) by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively; and

(B) by inserting after paragraph (1) the following:

`(2) FUNDING PORTALS-

`(A) LIMITATION ON STATE LAWS- Except as provided in subparagraph (B), no State or political subdivision thereof may enforce any law, rule, regulation, or other administrative action against a registered funding portal with respect to its business as such.

`(B) EXAMINATION AND ENFORCEMENT AUTHORITY- Subparagraph (A) does not apply with respect to the examination and enforcement of any law, rule, regulation, or administrative action of a State or political subdivision thereof in which the principal place of business of a registered funding portal is located, provided that such law, rule, regulation, or administrative action is not in addition to or different from the requirements for registered funding portals established by the Commission.

`(C) DEFINITION- For purposes of this paragraph, the term `State' includes the District of Columbia and the territories of the United States.'.

(a) In General- Section 3(b) of the Securities Act of 1933 (15 U.S.C. 77c(b)) is amended--

(1) by striking `(b) The Commission' and inserting the following:

`(b) Additional Exemptions-

`(1) SMALL ISSUES EXEMPTIVE AUTHORITY- The Commission'; and

(2) by adding at the end the following:

`(2) ADDITIONAL ISSUES- The Commission shall by rule or regulation add a class of securities to the securities exempted pursuant to this section in accordance with the following terms and conditions:

`(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption added in accordance with this paragraph shall not exceed $50,000,000.

`(B) The securities may be offered and sold publicly.

`(C) The securities shall not be restricted securities within the meaning of the Federal securities laws and the regulations promulgated thereunder.

`(D) The civil liability provision in section 12(a)(2) shall apply to any person offering or selling such securities.

`(E) The issuer may solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the Commission may prescribe in the public interest or for the protection of investors.

`(F) The Commission shall require the issuer to file audited financial statements with the Commission annually.

`(G) Such other terms, conditions, or requirements as the Commission may determine necessary in the public interest and for the protection of investors, which may include--

`(i) a requirement that the issuer prepare and electronically file with the Commission and distribute to prospective investors an offering statement, and any related documents, in such form and with such content as prescribed by the Commission, including audited financial statements, a description of the issuer's business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters; and

`(ii) disqualification provisions under which the exemption shall not be available to the issuer or its predecessors, affiliates, officers, directors, underwriters, or other related persons, which shall be substantially similar to the disqualification provisions contained in the regulations adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d note).

`(3) LIMITATION- Only the following types of securities may be exempted under a rule or regulation adopted pursuant to paragraph (2): equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities.

`(4) PERIODIC DISCLOSURES- Upon such terms and conditions as the Commission determines necessary in the public interest and for the protection of investors, the Commission by rule or regulation may require an issuer of a class of securities exempted under paragraph (2) to make available to investors and file with the Commission periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters, and also may provide for the suspension and termination of such a requirement with respect to that issuer.

`(5) ADJUSTMENT- Not later than 2 years after the date of enactment of the Small Company Capital Formation Act of 2011 and every 2 years thereafter, the Commission shall review the offering amount limitation described in paragraph (2)(A) and shall increase such amount as the Commission determines appropriate. If the Commission determines not to increase such amount, it shall report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on its reasons for not increasing the amount.'.

(b) Treatment as Covered Securities for Purposes of NSMIA- Section 18(b)(4) of the Securities Act of 1933 (as amended by section 303) (15 U.S.C. 77r(b)(4)) is further amended by inserting after subparagraph (C) (as added by such section) the following:

`(D) a rule or regulation adopted pursuant to section 3(b)(2) and such security is--

`(i) offered or sold on a national securities exchange; or

`(ii) offered or sold to a qualified purchaser, as defined by the Commission pursuant to paragraph (3) with respect to that purchase or sale;'.

SEC. 402. STUDY ON THE IMPACT OF STATE BLUE SKY LAWS ON REGULATION A OFFERINGS.

The Comptroller General shall conduct a study on the impact of State laws regulating securities offerings, or `Blue Sky laws', on offerings made under Regulation A (17 CFR 230.251 et seq.). The Comptroller General shall transmit a report on the findings of the study to the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate not later than 3 months after the date of enactment of this Act.

TITLE V--PRIVATE COMPANY FLEXIBILITY AND GROWTH

SEC. 501. THRESHOLD FOR REGISTRATION.

Section 12(g)(1)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(1)(A)) is amended to read as follows:

`(A) within 120 days after the last day of its first fiscal year ended on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by either--

`(i) 2,000 persons, or

`(ii) 500 persons who are not accredited investors (as such term is defined by the Commission), and'.

SEC. 502. EMPLOYEES.

Section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(5)), as amended by section 302, is amended in subparagraph (A) by adding at the end the following: `For purposes of determining whether an issuer is required to register a security with the Commission pursuant to paragraph (1), the definition of `held of record' shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act of 1933.'.

SEC. 503. COMMISSION RULEMAKING.

The Securities and Exchange Commission shall revise the definition of `held of record' pursuant to section 12(g)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)(5)) to implement the amendment made by section 502. The Commission shall also adopt safe harbor provisions that issuers can follow when determining whether holders of their securities received the securities pursuant to an employee compensation plan in transactions that were exempt from the registration requirements of section 5 of the Securities Act of 1933.

The Securities and Exchange Commission shall examine its authority to enforce Rule 12g5-1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the rule, and shall, not later than 120 days after the date of enactment of this Act transmit its recommendations to Congress.

TITLE VI--CAPITAL EXPANSION

SEC. 601. SHAREHOLDER THRESHOLD FOR REGISTRATION.

(a) Amendments to Section 12 of the Securities Exchange Act of 1934- Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is further amended--

(1) in paragraph (1), by amending subparagraph (B) to read as follows:

`(B) in the case of an issuer that is a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), not later than 120 days after the last day of its first fiscal year ended after the effective date of this subsection, on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by 2,000 or more persons,'; and

(2) in paragraph (4), by striking `three hundred' and inserting `300 persons, or, in the case of a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons'.

(b) Amendments to Section 15 of the Securities Exchange Act of 1934- Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) is amended, in the third sentence, by striking `three hundred' and inserting `300 persons, or, in the case of bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons'.

SEC. 602. RULEMAKING.

Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission shall issue final regulations to implement this title and the amendments made by this title.

TITLE VII--OUTREACH ON CHANGES TO THE LAW

SEC. 701. OUTREACH BY THE COMMISSION.

The Securities and Exchange Commission shall provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act.

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About Me

A veteran entertainment lawyer, arbitrator, expert witness and author, Mark Litwak has provided legal services or acted as a producer rep on more than 100 feature films. He is the author of 6 books including: Reel Power, Dealmaking in the Film and Television Industry (winner of the 1995 Kraszna-Krausz Book Award), Contracts for the Film and Television Industry, and Risky Business: Financing and Distributing Independent Film. He is also the author of the popular CD-ROM Movie Magic Contracts.
As a law professor, he currently teaches at the U.S.C. School of Law, and has previously taught at the Univ. of Puget Sound and Loyola Law Schools. He has been on the faculty at UCLA for 24 years. He has lectured for the American, California and Texas bar associations. A frequent speaker, he has lectured at many universities including Harvard, the American Film Institute, Columbia University and NYU. He has also presented movie industry seminars in England, Australia, South Africa and Canada.
Mark Litwak is AV®
Peer Review Rated by Martindale-Hubble and has been named a Superlawyer multiple times by the publishers of Law and Politics Magazine.